Dumb Move

by Alan Deutschman

Mercedes-Benz is blowing a big opportunity for leadership. Six years ago, it introduced what is perhaps the most radically innovative car in the world, the Smart, which it now sells in 31 countries. But not in the United States.

I was excited when I heard that Mercedes would begin offering the vehicle here in the fall of 2006. Smart has an eye-popping design (already featured at the Museum of Modern Art), it is eco-sensitive (it gets 60 miles to the gallon, and it's entirely recyclable), and it's amazingly parkable — at only 8 feet long, it's 3 1/2 feet shorter than BMW's Mini Cooper. You can fit two or three Smart cars in a regular parking spot, which is one reason they're ubiquitous on the streets of London, Paris, and Rome. The Smart car would be perfect for New York, San Francisco, and Boston, too. It would help Mercedes's image among the youthful thought leaders who have a powerful influence on the culture.

But it turns out that Mercedes isn't bringing us the original, tiny two-seater model, the "fortwo," which it has been showing off at events such as the New York City Marathon as part of a long-lead marketing campaign. Instead, the company is attempting a dubious bait-and-switch tactic. What we'll get here is a new model, an "SUV" they actually call it, created especially for the world's most bloated and wasteful consumer nation. A Smart executive says a suburb-worthy, family-friendly vehicle is critical for the United States, but isn't a "Smart SUV" an oxymoron, like "jumbo shrimp"? At press time, the "formore" was set to be unveiled at the Detroit Auto Show. Mercedes executives hinted that it would be around the same size as the popular Toyota RAV4 or Honda CR-V. What's innovative about that?

Mercedes looks especially cowardly for swapping the microcar with the SUV since it's only aiming to sell 30,000 Smarts a year in the States. Given that tiny market niche — only two-tenths of 1% of the 17 million new cars sold in this country each year — Mercedes seems inexplicably timid in failing to stick with its radically small model. Surely it could move 30,000 fortwos here. Every year, BMW has been selling that many Mini Coopers, which is one of the few car models from any manufacturer that haven't required price incentives, says Karl Brauer, the editor-in-chief of auto Web site Edmunds.com. By continuing to sell without discounts, the Mini has actually been profitable, which is rare for small cars these days.

Granted, Mercedes has left open the possibility that it will bring us the fortwo in 2007 or later, but the model that marks Smart's debut in the States will have symbolic power. It's the one that makes the statement about what the brand is all about. Mercedes is choosing to pander to the tried and true rather than appeal to the small number of people here who want to be leaders rather than followers.

Mercedes and BMW both sell more than 1 million vehicles a year worldwide, so a 30,000-unit niche car isn't going to have a lot of impact on the bottom line. The main motivation behind Mini and Smart alike is to help the parent companies establish a connection to younger consumers who might later buy from the main brand. The entry brand sends a message about the company's values and aspirations. In the rest of the world, Mercedes — through Smart — is seen as a fast company, a risk taker on the edge of design and environmentalism. It could have earned that image here, too. Instead, Mercedes is blowing it.

Smart Move

By John A. Byrne

The Mercedes-Benz Smart car is adorable. It's sporty and dynamic, uniquely designed, even intelligent and practical. Imagine getting 436 miles on a single tank of gas from a car that's not even a hybrid. But America is not ready for it.

By launching a compact SUV in the United States instead of its highly innovative Smart lineup of cars, Mercedes is making a smart strategic choice. It's a decision right out of Michael Porter's textbooks on strategic thinking. You examine your relative position against the competition and weigh future demand for a product against industry trends. That might not sound like much fun compared with what's cool, what's hot, and what's novel, but it's a surefire way to make money.

Let's face the facts: Americans are spoiled, and they love big things. The "bigger is better" notion is ingrained in a society that concerns itself with status and power. That's why the average size of a new U.S. home exceeds 3,000 square feet. And why there are more than 24 million gas-guzzling SUVs on U.S. roads, one for every eight licensed drivers. The last thing any red-blooded American wants is to crawl into the tiniest car on the road, a car with an engine that's smaller than one in a Harley.

My hunch, and probably Mercedes's too, is that as gas prices increase, most drivers will trade in their full-size SUVs for smaller, more fuel-efficient models. They won't opt for cars, and they certainly won't give up their trucks for a car that looks, as one wag noted, "like something from the world of Teletubbies."

Mercedes is smartly going where the market is headed. "We think that this fuel-efficient segment of the SUV category will have sales growth of at least 30%" over the coming year, Paul Taylor, chief economist for the National Automobile Dealers Association, wrote in a recent analysis. Meantime, sales of large SUVs are expected to stay flat or even decline.

Besides, Mercedes's decision doesn't prevent the company from launching its diminutive two-seaters in the States in a few years. By then, the company will have given itself enough time to build a separate dealer and service network that will not only sell a very different experience to the American consumer but can help create a valuable and enduring brand. The more expensive "formore" SUV, with a four-cylinder Mercedes-Benz engine and all-wheel drive, may well pave the way for the smaller Smart cars later on.

The delay also does something even more important for Mercedes: It gives the company time to figure out how to make money on Smart. The car may be fuel efficient, but it's a guzzler when it comes to profits. Even though Mercedes sold some 160,000 Smart minicars abroad last year, the division has yet to turn a profit. The company doesn't break out its Smart results, but the general consensus is that Mercedes is losing big money on these small cars. Analysts estimate that Mercedes invested $1 billion to launch the brand and has already racked up more than $2 billion in losses since the car's debut in 1998.

If strategy is the search for above-average returns, launching a money-losing minicar in the world's biggest auto market — and one that cherishes bigness — is not smart strategy at all. Mercedes got it right.

A version of this article appeared in the February 2005 issue of Fast Company
magazine.

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